Volkswagen's Big Lie

Volkswagen's Big Lie

This article appeared in the Spring, 2016 issue of The American Prospect magazine. It was written prior to Volkswagen's recent emissions violations settlement.

In September 2015, Volkswagen shocked the automotive industry and the world by admitting publicly that, since 2008, it had duped consumers and violated U.S. federal and state emission laws by using a “defeat device” or “cheatware” in its diesel automobiles. The cheatware detected when the car was being put through an emissions test cycle and made the exhaust emissions compliant only during the test.

Under actual driving conditions, emissions of certain toxic pollutants shot up to as much as 40 times more than the tests found. The cheatware had been installed in some 11 million VW vehicles worldwide, as well as Audis and Porsches, including nearly 600,000 vehicles in the United States.

The impact of this disclosure on VW has been calamitous. VW stock has lost a third of its value since the scandal broke. Its new-car sales in the United States are plunging, due in part to a mandated stop-sale on all new diesels, even as U.S. car sales overall are reaching decade highs. If that weren’t bad enough, VW is facing numerous civil suits as well as enforcement measures and fines from both the Environmental Protection Agency (EPA) and the state of California. VW is also under investigation by regulators in Europe.

The scale and audacity of the deception are especially stunning given VW’s prominence in the automotive industry. VW is not only Germany’s largest automaker; in the first half of 2015, it briefly surpassed Toyota to become the largest automaker in the world, a position it might have maintained if not for the scandal. VW’s nearly 600,000 employees produce about 41,000 vehicles a day. VW owns 12 subsidiaries, including such renowned and high-profile names as Audi, Skoda, Bentley, Bugatti, Lamborghini, Ducati, and Porsche.

AP Photo/Jon Elswick

The exhaust system and muffler on a 2010 Volkswagen (VW) Jetta SportWagen TDI diesel car is photographed on Thursday, April 1, 2016, in Rockford, Illinois. The car is one that is part of the emissions cheating scandal.

The scandal highlights two broader problems. The first involves automakers that have lagged behind their rivals in developing electric and hybrid cars and in adjusting to global concerns about air pollution and climate change. German car manufacturers have long been leaders in diesel engines, which can generate high levels of pollution. Even as other automakers developed hybrids in the 1990s and early 2000s, the German automakers stuck with what they knew best. Instead of developing cleaner and more fuel-efficient cars, they produced ever more powerful engines and focused exclusively on growth. This was the context of VW’s deception: The company doubled down on diesel and sought to evade environmental regulation rather than take on the challenges of innovation in an environmentally conscious age.

The second issue highlighted by the scandal has to do with regulatory enforcement. Like other regulatory agencies, the EPA has faced budget cuts that have affected its enforcement capabilities; VW’s deception came to light only as a result of a privately funded research project. This is a story not just about an incidental failure to enforce environmental standards, but about the vulnerability of regulatory agencies to deliberate and systematic corporate evasion.

VOLKSWAGEN'S STORY HAS an infamous beginning: The company originated as the brainchild of Adolf Hitler and made extensive use of slave labor during World War II. Very few Germans owned cars in 1934, when Hitler hired Ferdinand Porsche to design a small and inexpensive “people’s car” for the masses. Porsche designed a streamlined, rear-engine, air-cooled small car that was forward-thinking, fuel-efficient, and inexpensive to produce. However, the completion of the factory, located in present-day Wolfsburg, coincided with Germany’s invasion of its neighbors and the start of World War II, so very few VW passenger cars were actually produced (Hitler received one of the few made as a gift on his 50th birthday). The factory instead turned to producing military vehicles and would eventually depend on a workforce of more than 15,000 slave laborers from Nazi concentration camps. In response to a lawsuit from survivors in 1998, VW set up a $12 million restitution fund.

In the late 1940s, VW emerged from the ashes of the Third Reich to launch the Porsche-designed VW Beetle. Over 21 million of the cleverly marketed and beloved original Beetles would be sold by the time it was taken off the market in 2003, making it the bestselling car in the world. As Volkswagen grew, it absorbed other companies and brands. This focus on growth and global market share increased in the last decade as VW set its sights on surpassing Toyota to become the largest automaker in the world. One barrier to VW’s global ambition was its trouble selling vehicles in the United States, then the world’s most lucrative car market.

The problem, says John Voelcker, an industry analyst and senior editor for Internet Brands Automotive Group, is that Volkswagen didn’t dedicate the time and resources to strategizing how to best design cars to fit the needs and desires of the U.S. consumer. VW largely ignored America’s love affair with minivans and SUVs, and until recently scoffed at the burgeoning interest in hybrids and electric cars. Instead, Volkswagen wanted U.S. consumers to buy the same kind of cars it was so successful selling in Europe, namely diesels. In Europe, half the new cars sold are diesels and much of that market belongs to VW.

The diesel engine, which relies upon compression instead of spark plugs for ignition, appeals to Europeans because it gets excellent mileage while providing sporty performance. In many European Union countries such as England and Germany, diesels also benefit from government incentives and subsidies. In the United States, diesel has had a much harder time capturing the interest of passenger-car buyers, though it’s popular with truck buyers. Cheap gas prices and a generally tepid interest in fuel economy have been a big part of the problem. Diesel was also dealt a setback by General Motors’ misguided foray into diesel-engine production in the late 1970s and early 1980s. GM produced such notable flops as the diesel Oldsmobile Cutlass and the diesel Cadillac Eldorado, which cemented in many minds a stereotype of diesels as being unreliable, underpowered, and smoky.

Thanks to technological advances in the 1990s, however, many foreign manufacturers such as VW, Volvo, and Mercedes began to make modest inroads into the U.S. market with their diesel passenger cars. The incorporation of turbochargers and direct rail injection significantly enhanced performance and efficiency and overcame the major consumer complaints about earlier diesel cars. The main problem with diesels, especially for well-regulated and emission-sensitive markets like the United States, is that they can create more local pollution than their gasoline-powered equivalents. While diesel engines have lower CO2 emissions, diesel’s efficiencies at combusting fuel rely on high combustion temperatures and high engine compression ratios that also create excessive amounts of certain pollutants, especially nitrogen oxides (NOx). NOx contributes to smog and ground-level ozone; diesels also emit fine particulate matter, which is linked to lung disease and cancer. According to the EPA, exposure to these pollutants can cause respiratory illness, especially in children, as well as premature death.

PUBLIC CONCERN ABOUT AIR quality and tailpipe emissions first emerged as a public issue in California. In the years after World War II, Los Angeles began to suffer from periods of dense smog as car ownership soared and the metropolitan region became heavily suburbanized. National concerns about air pollution grew in the 1960s, resulting in the passage of the Clean Air Act of 1963. A strengthened Clean Air Act in 1970 and the establishment of the EPA the same year further empowered the federal government to regulate air pollution. By 1975, federal exhaust emission standards required carmakers to install catalytic converters. California had even tougher standards. The California Air Resources Board, established in 1967, had its own program to regulate tailpipe emissions, and the federal government gave the state a recurring waiver to enforce stricter emissions standards than those dictated by federal law.

Regulations aimed at controlling air pollution have proven to be effective at protecting public health. Reductions in airborne pollutants from cars, trucks, power plants, and factories have extended life expectancy, preventing hundreds of thousands of premature deaths and cases of bronchitis and other diseases since 1970. Requirements for lead-free gasoline, which the EPA began imposing in 1978, are one of the greatest success stories of public health, responsible for dramatic reductions in blood lead levels known to cause brain, kidney, and cardiovascular damage. The improvements in air quality are most stark in large cities. In Los Angeles, smog-causing pollutants have been reduced by 98 percent since 1960 despite a tripling of fuel consumption. The bulk of the gain in air quality comes from cleaner cars. If nothing had been done about auto emissions, many major metropolitan areas in the United States would now have third-world levels of air pollution rivaling Manila or even Delhi, the most polluted city in the world.

AP Photo/Michael Sohn, file

An activist of the environmental protection organization Greenpeace holds a protest poster in front of a factory gate of the German car manufacturer Volkswagen in Wolfsburg, Germany, Friday, September 25, 2015, where the supervisory board meet to discuss who to name as CEO after Martin Winterkorn quit the job this week over an emissions-rigging scandal that's rocking the world's top-selling automaker.

More stringent U.S. air pollution regulation began to affect German automakers in 1994, when the EPA had phased in significantly reduced permissible levels of emissions for cars and trucks. The agency phased in even stricter standards from 2004 to 2009. The new regulations significantly increased diesel emission standards. These far exceeded existing European standards, and required the passenger diesel manufacturers such as BMW, Mercedes, and VW to add new and potentially expensive exhaust treatment systems to their diesel vehicles. In fact, all new diesels were pulled off the market in 2008 because they couldn’t be certified, but the next year, the German automakers began reintroducing passenger diesels outfitted with new regulation-compliant emission controls.

The emission system used by both BMW and Mercedes is called a selective catalytic reduction system, or SCR. This system, which requires a fair amount of plumbing and bulky hardware, reduces NOx by squirting automotive-grade urea, otherwise known as diesel exhaust fluid, into the exhaust stream. An effective and proven process, this method can remove up to 90 percent of NOx while reducing the level of other pollutants as well. The downside of SCR is that it is expensive, takes up trunk space, and requires a separate tank for the diesel exhaust fluid. The inconvenience of making a trip to the dealer to refill this separate tank is regarded as a big negative for many consumers who might otherwise consider diesel. Refilling the tank is not optional; if the tank runs dry, the car will not operate. This equipment can be engineered to fit in larger sedans such as those produced by BMW and Mercedes, but it poses a bigger challenge for compact cars.

Initially, VW opted for a different system called a lean NOx trap. It’s a compact, inexpensive system that uses an exhaust trap combined with complicated adjustments to the fuel mixture to reduce NOx emissions. VW asserted that its cutting-edge engineering had created an entirely new combustion process that solved its diesel emissions challenges while maintaining fuel efficiency and performance. Other automakers, car magazines, and industry analysts were generally impressed, though a little baffled.

“None of the other automakers could figure out how Volkswagen did it,” says John Voelcker. “Infiniti, Subaru, and Honda were all looking to launch diesels. None of those makers could get their diesels to comply and still provide suitable acceleration, performance, and fuel economy. So basically for eight years, engineers at other companies scratched their heads and finally said, ‘You know, Volkswagen must just have really good engineers.’”

Impressed by the achievement, Green Car Journal named the 2009 VW Jetta TDI Green Car of the Year, the first time a diesel had garnered that honor. VW parlayed this recognition into a successful marketing campaign that branded VW as an innovator leading the way with its self-proclaimed “Clean Diesel” technology. The company’s ads focused on redefining diesel as clean; one ad featured three presumptive “old wives” arguing about diesel. The ad dismissively labeled the idea of diesel being dirty as an old wives’ tale.” VW also waged an online campaign through their interactive site tditruthordare.com, which challenged consumers on their “misconceptions” about diesels as being polluters and pitted VW diesels in an “eco-conscious car showdown” against cars such as the Prius.

Although diesel cars remained a small niche market in the United States, Volkswagen soon dominated it. VW’s overall U.S. sales did very well, too; it doubled its vehicle sales from 2009 to 2012 and seemed like it might be on track to meet its ambitious goal of selling a million cars a year in the United States by 2018. Volks-wagen’s aggressive and often clever marketing campaigns were successful in both raising its brand profile and attracting a specific type of car buyer for its diesel line of cars equipped with turbocharged direct injection. VW’s diesels appealed to a segment of the market as an iconoclastic kind of anti-Prius, a very sporty but environmentally responsible car that boasted not only great performance but also enviable gas mileage. In 2009, as a further incentive, VW’s diesels each qualified for an advanced lean-burn federal tax credit of $1,300.

VW'S DECEIT BEGAN TO collapse in the fall of 2013 with a study of diesel cars by the International Council on Clean Transportation (ICCT), a nonprofit organization that supports cleaner and more efficient vehicles. The purpose of the study, according to Drew Kodjak, the executive director, was relatively simple and straightforward.

“It started in Europe, where half of the vehicles sold are diesels,” says Kodjak. “A variety of different testing sources showed that passenger diesel vehicles in Europe were emitting many times the legal limits. We decided to do some testing in the U.S. on light-duty vehicles in order to demonstrate that it was possible to achieve low emissions not only on the test cycle but also under normal operating conditions.”

AP Photo/Ferdinand Ostrop

The engine type is displayed on Volkswagen Passat in Nauen, Germany, Thursday, September 24, 2015.

ICCT contracted with West Virginia University to do the actual road tests, which were anticipated to provide data on how diesels can be both fuel-efficient and low-emitting. The West Virginia researchers chose California as the testing site for the cars because the state has a large proportion of all the diesels in the United States as well as a wide variety of terrains and conditions to test car performance. Three diesel passenger vehicles were tested: a VW Jetta, which used a lean NOx trap to treat its emissions, and a BMW X5 and VW Passat, both of which used selective catalytic reduction exhaust systems. The California Air Resources Board provided lab testing equipment. Before road testing, all three cars passed emissions tests at a state testing facility.

The researchers then fitted the cars with portable emissions monitors and drove them extensively over a number of days on changing terrain and in a wide variety of driving conditions. Although vehicles are expected and allowed by regulators to perform differently under changing driving conditions, a disturbing pattern soon emerged for both Volkswagens. Even when the Passat and Jetta were in optimal conditions for low emissions, such as steady highway speeds, both VWs unexpectedly emitted a huge amount of NOx tailpipe pollution. The emissions were so high as to be virtually uncontrolled.

“A vehicle manufacturer is not required to meet any on-road emissions standards, but you shouldn’t see such a magnitude of difference between what is being performed on the test cycle and on the road,” explains Arvind Thiruvengadam, an assistant professor at West Virginia University and a member of the research team. “The magnitudes we observed, such as 30 times or 40 times [the legal limit], were alarming.”

This problem applied only to the VW diesels. The diesel BMW, which used the same SCR emission system as the VW Passat, showed only the expected emissions variation between its test cycle and real-world testing. When ICCT published its report in May 2014, the dominoes suddenly began to fall. The EPA and the California Air Resources Board began doggedly to investigate the problem on their own and to demand answers from VW. A year later, discussions between the regulators and VW became heated, and the EPA pushed VW to come clean about what had happened.

On September 22, 2015, VW’s chief executive, Martin Winterkorn, declared in a video statement that he was “endlessly sorry we betrayed the trust of customers” and that “the irregularities with these engines contradict everything for which Volkswagen stands. To make it very clear: Manipulation at VW must never happen again.” Winterkorn also promised swift action and full transparency. That a company as huge and important as VW would design its cars to cheat on emission standards stunned and outraged not only consumers but regulators and the automotive industry as well. VW’s mea culpa was a very unusual move; it’s virtually unprecedented for a major corporation to admit full culpability in its immediate response to a huge scandal.

“As any good American businessman knows, you never admit anything, you never apologize for anything,” says Steve Lehto, a consumer protection attorney. “You can’t take that back. Nobody will believe you.”

Nonetheless, VW tried to do precisely that. Winterkorn resigned soon after his statement to be replaced by Matthias Mueller. In January, when Mueller visited the Detroit Auto Show, he did little to endear himself to American consumers or address their concerns about the scandal. Instead, when interviewed by NPR, Mueller denied that VW had lied to the EPA and instead implausibly insisted VW had simply misunderstood American emissions regulations.

“It’s very interesting at the very beginning of this that they owned the problem when it came to light,” says Mark Stevenson, an auto analyst and managing editor at The Truth About Cars. “Ever since that moment, they’ve been trying to find legal ways to get out of doing things. They had this amazing opportunity where they could have said, ‘Yes we did it, and in two months we are going to tell you exactly what we are going to do about it.’”

To fend off its steadily mounting legal challenges, VW has hired Kirkland & Ellis, the U.S. law firm that defended BP against criminal charges resulting from the Deepwater Horizon oil spill disaster. In a goodwill gesture, VW has offered a $500 Visa prepaid gift card as well as a $500 VW dealership gift card to owners of the affected diesels. VW hasn’t yet offered a clear explanation of why it installed the cheatware, who made the decision, and who knew about it.

Most important, VW has also failed to announce a sufficient technical fix for any of the implicated 2009–2015 diesels, probably because the technical solution is likely to prove very thorny from an engineering as well as a logistical standpoint, and will no doubt be financially punishing for the company. Two versions of VW’s diesel engines are under stop-sale. The first is the larger 3.0-liter TDI diesel, which can be found in VW, Audi, and Porsche SUVs and affects around 85,000 vehicles. These vehicles violate EPA regulations because they contain software that was not disclosed as is required by law. These should be fixable by a software tweak.

VW’s more prevalent 2.0-liter TDI diesel engines from the model years 2012 to 2015 are equipped with an SCR system. They should be able to pass emissions tests once the offending cheatware is removed. The first generation of diesels sold from 2009 to 2011 poses the biggest dilemma for VW. Unfortunately for VW, this engine comprises the bulk of the 2.0-liter engines in question, an estimated 365,000 of the roughly 485,000 problem passenger cars. These earlier cars have a NOx trap emissions system as opposed to the SCR system. An SCR system would probably have to be retrofitted to make the cars compliant.

“It’s a nightmare,” says John Voelcker. “You’re effectively talking about retrofitting into 365,000 old cars something that they were never designed to have. It’s easily several thousand dollars a car if you can even get the plan signed off on.”

Each model of car would likely require a separate and specific engineering fix, and each model would also have to be retested and approved by the federal government. Another looming issue for VW is how it would incentivize customers to bring their cars back in for a “fix” that would likely negatively affect performance and gas mileage. Further, except for California and a few other states, most states don’t require car owners to comply with vehicle recalls to maintain vehicle registration; as Rachel Cohen has shown in the Prospect, millions of cars recalled as a result of safety defects remain on the road. Low consumer compliance with recalls raises the specter that even if VW provides a fix, many of its cars will remain on the road and continue to pollute at high levels. Some countries, such as Germany, mandate that owners fix vehicles under recall; the U.S. ought to move toward a similar policy on both public-safety and environmental grounds.

The other option for VW, and perhaps the cheaper and certainly simpler alternative, is to just cut its losses and buy back the earlier diesels that would need hardware retrofitting. Then the troubling question arises about what VW would do with the unsalable bought-back cars. Would the company crush them or re-sell them in a less-regulated market like Mexico, where they can continue to spew out pollutants?

Uwe Anspach/picture-alliance/dpa/AP Images

Before being sacked, CEO Martin Winterkorn said VW was "endlessly sorry we betrayed the trust of customers."

As daunting and expensive as the technical fixes may be, the legal issues facing Volkswagen may prove even more cataclysmic for the company. Ironically, VW’s short-lived burst of honesty and integrity may deny it the familiar corporate course of plausible denial or of scapegoating one or more low-level malefactors before settling with the concerned parties. Indeed, the scale and duration of VW’s law-breaking as well as the apparent forethought and effort put into perpetrating the fraud seem to indicate that the malfeasance may have had high-level approval, either tacit or explicit. Regardless of who thought up, engineered, or approved the fraud, VW’s post-scandal behavior hasn’t sat well with regulators, nor will it work to its advantage as the company tries to fend off the rising number of class-action suits. These lawsuits stem primarily from diesel-car owners but include investors as well. VW fought to have the cases consolidated and heard in Detroit, a city generally friendly to car manufacturers. Instead, the cases will be heard in California, where judges and juries are not expected to be especially lenient.

Only time will tell how financially damaging those civil lawsuits will ultimately be. The legal outcome on the civil side pivots in large part on how VW decides to deal with the existing problem diesels. If VW is capable of fixing all the diesels concerned, even the earlier models, the damages any individual owner can claim will likely be very limited. Even if the aftermarket application of new emission-control equipment or another fix reduces gas mileage, owners will be entitled only to damages they suffered—in this case, the money they would lose at the pump over the remaining lifetime of the vehicle. For any individual, this might not amount to much money, maybe not even enough to fight over, though in a class-action suit it could still be significant. If the company can’t or won’t fix the problem, the story changes and the door opens to potentially much wider damages.

The criminal charges Volkswagen is facing are another matter entirely. Even if Volkswagen somehow manages to fix every one of its problem diesels, the criminal charges are not going to go away. As a company, VW has admitted to breaking federal law by violating the Clean Air Act, and in a suit filed by the Department of Justice in January, VW faces a fine of up to $37,500 per vehicle as well as additional fines that could total $48 billion. VW also violated California state law as well as the laws of other states that follow California’s emission standards, although it’s less clear what fines it is facing for those violations. VW continues to submit proposals to both the EPA and the California Air Resources Board, but as of this writing, all the proposed fixes have been rejected as being insufficient. If that weren’t enough bad news for VW, it is also being investigated by the Senate for falsifying emissions claims and unjustly benefitting from more than $50 million in federal tax credits.

The clock is ticking for VW. Enormous damage has been done to VW’s brand and credibility, and every day that VW postpones decisive action its 2016 diesels sit unsold and unsellable on dealers’ lots. The burden of all the unresolved legal and technical issues, not to mention the mounting anger and frustration of those who bought a car under false pretenses, will continue to drive potential customers away.

As severe as the damage is that VW has inflicted on itself as well as on VW owners, dealerships, and investors, there are two other big losers in this scandal as well. The first is the concept of diesel engines as being a greener or better alternative to gasoline engines. Europeans adopted diesel in the 1990s partly as a way to combat greenhouse emissions since diesels emit less CO2 than gas engines. More recently, however, there has been growing alarm in Europe about the level of smog and particulate matter in large cities; in fact, Paris and London may ban diesels. Even though VW denies violating Europe’s laxer emission regulations, the scandal accentuates public concerns about the high levels of diesel-generated pollutants in the continent’s large cities and may well change how European governments and consumers make decisions about cars.

AP Photo/Rick Bowmer, File

Volkswagen's 2016 diesels sit unsold and unsellable on dealers' lots all over the U.S.

In the United States, the future of diesel is not in debate. Barring a miracle, the diesel passenger car in America is dead, except for a small number of high-end Mercedes and BMWs. VW was the only seller and proponent of mid-level diesel cars, and without its market presence, diesel now lacks both a major sales platform and an advocate. Many environmentalists see the collapse of diesel as a positive development, potentially accelerating the trend away from combustion engines to hybrid and plug-in electric vehicles. Elon Musk, founder of the electric car company Tesla Motors, has proposed that California not fine VW but instead require it to ramp up the rollout of zero-emission cars. The writing may be on the wall for not just diesel engines but combustion engines in general. Although hybrid and electric cars currently account for only a fraction of new-car sales in the United States, new standards mandate that automakers meet a fleet average of 54 miles per gallon by 2025. To achieve these numbers, automakers will have to commit to selling many more low- or zero-emission automobiles.

Some companies are meeting the challenge head-on; BMW recently announced that by 2025, its entire line of vehicles will be plug-in hybrids or electric. In the wake of the scandal, VW said it will move away from diesel toward hybrids and plug-in electrics. However, given its late start, VW faces an uphill battle to catch up with the Japanese and U.S. automakers that currently dominate the market.

The public is the other big loser in this scandal. It’s difficult to attach a hard number to VW’s misdeeds, but estimates put the excess pollution created by the outlaw diesels annually at between 10,000 and 40,000 extra tons of NOx in the United States alone. EPA studies have priced the health burden of NOx emitted from vehicles at $7,300 per ton, which puts a low-end value of $100 million a year in health-related damages from the excess emissions. These numbers rise drastically when calculating the global environmental damage. The Guardian estimates the 11 million cars affected globally will create up to an additional 948,691 tons of NOx emissions annually. Behind those numbers is the human cost of more cases of lung disease, cancer, and premature death. It’s clearly urgent for VW to find a fix for its polluting diesels as quickly as possible before more damage is done.

The VW scandal also reveals limits in the enforcement of federal and state emissions regulations. For years, VW was able to get away with brazen cheating; its misdeeds were discovered accidentally by a third party, not a regulatory agency. Since Republicans took control of Congress in 2010, the EPA’s budget has been slashed by more than 20 percent; as a result, the agency’s staff level is now the lowest it has been since 1989. Unable to do complete testing and enforcement of emissions standards and other rules, the EPA and other agencies have increasingly relied on self-certification by automakers.

“Our system has been based on a certain level of trust,” says John Swanton, a communications specialist at the California Air Resources Board. “When you’re deliberately trying to get around things and fool people, that throws the whole process into question.”

In the wake of the scandal, both the EPA and the California board announced that they will do more road-testing and spot-checking of vehicles to make sure that they are compliant under real-world conditions. New enforcement measures by the EPA will likely require additional appropriations, which may be hard to come by if Republicans hold power over the budget.

If there is a silver lining to the VW scandal, it may be to persuade other corporations that skirting governmental regulations isn’t worth the short-run gain and that doubling down on old fossil-fuel technology could boomerang and prove financially disastrous. Through their duplicity and lust for profits and growth at any cost, Volkswagen’s leaders killed the thing they wanted most: a growing and lucrative American market for their cars.